March 01, 2002

Introduction

President of Mexico Vicente Fox has announced that one of the priorities of his administration will be the development of the energy sector. He is well aware of the current needs for investment in this sector, particularly in power generation and non-associated gas exploration and production. He is also aware that the government will not have the necessary funds to match the anticipated growth of energy demand.

The Mexican Constitution reserves to the state the generation, transmission, and distribution of electricity as a public service. The Constitution also reserves to the state the exploration and production of all hydrocarbons located in Mexico. Under the current legal regime, there is very little room for private investment in this sector and the necessary funds for its development will have to come from the federal budget, unless legislation is passed to allow some form of private participation.

The energy sector plays a very important role within the national economy. It provides 3% of the Gross National Product, represents 8% of the total Mexican exports, and provides 37% of the federal income. The federal government spends 56% of its yearly budget on energy-related investments. However, it is foreseen that the energy sector will need a total of 139 billion dollars of investment over the next seven years to match the growing demand.

President Fox’s challenge is to find alternatives to attract private investment in this sector. Last December, Fox’s political party, the PAN, presented to the Mexican Congress an initiative to amend the Constitution to allow private investment in the electricity industry, which will be debated in the next few months. The political mood in Mexico may not be conducive to the proposed constitutional amendments for two reasons. First, former president, Ernesto Zedillo failed to pass constitutional reforms to permit private participation in the electric sector pursuant to privatization of state-owned assets. Second, President Fox and his political party (PAN) lack a majority in Mexican Congress and need a coalition to pass such reform.

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